By Tiernan Ray

Shares of Broadcom (BRCM) closed up $2.97, or over 9%, at $34.84, after the company this morning said it will look to sell or wind down its baseband wireless processor chip business, with the help, of JP Morgan, aiming to save as much as $600 million a year in R&D and other operating expenses.

Broadcom has for several years competed against Qualcomm (QCOM), the top dog, but had to contend with rising efforts by number two vendor MediaTek of Taiwan, as well as a gaggle or others, including Intel (INTC) and China's Spreadtrum.

Broadcom reiterated an outlook for the current quarter ending this month for revenue in a range of $2 billion to $2.1 billion, but also said it “now expects both GAAP and non-GAAP product gross margin to be at or above the high end of the previously-guided range, driven principally by mix.”

During a conference call following the announcement, CEO Scott McGregor told analysts the company had good products in the works, but that the market opportunity didn't justify continued investment:

While we had executed well technically and have some pretty compelling products in the pipeline, we concluded the commercial and economic opportunity is not sufficient to justify the continued investment when compared to other opportunities within our portfolio [...] We plan to integrate the connectivity team with our broadband communications group and form the new broadband and connectivity group under Dan Morotta. Bob Rango will run our cellular baseband group and will help manage the sale of those assets. Looking forward, Broadcom will focus on the infrastructure, broadband and connectivity markets.Our infrastructure business continues to be strong and is expected to deliver its third consecutive year of double digit growth in 2014.

While the stock rises, there is a generally favorable reaction from the Street, although there has also been one downgrade so far, that I can see.

David Wong of Wells Fargo cut his rating to Underperform from Market Perform, writing that “While we had thought that it was questionable whether Broadcom would succeed in establishing a strong position in the 4G baseband market, Broadcom's announcement that it is looking at exiting this business does have a material impact on our view of the company and our estimates because it confirms what was previously a concern that might not have materialized.

Broadcom's growth may now trail that of the semi industry, he writes:

This action on Broadcom's part is likely, we believe, to pull down Broadcom's revenue growth in 2014 and 2015 below semiconductor market growth. We think there is the possibility that Broadcom's longer-term revenue growth rate might be below semiconductor average growth. We now think that Broadcom's long-term secular growth potential might be below 10%/year, and that its EPS growth potential might be of the order of 10-12%/year.

On the other hand, Bernstein Research's Stacy Rasgon, who has frequently called for the company to exit baseband, is not taking a victory lap, but he is upbeat about the development.

Reiterating an Outperform rating, and raising his price target to $45 from $32, he writes that the company has bowed to the inevitable, and that “The business currently has revenues of ~$200-$250M for 1H14, with gross profit dollars in the “10's of millions of dollars,” suggesting that the raw bottom-line impact for the exit should be minimal (and further highlighting the atrocious economics of the business).”

But Rasgon also has a number of questions about where the company goes from here, such as:

How much impact will this have on the remaining connectivity business? – Connectivity is currently annualizing at a ~$3B run rate. The company indicated that ~$500-$800 of this was for low and mid- end smartphones, and could conceivably be at risk in the long term without baseband. However, we note that the situation today is likely unchanged (e.g. this has probably always been at risk given baseband efforts have been wholly unsuccessful) [...] What would a potential acquirer really be buying? – We have to imagine that any current customers of Broadcom's baseband business are now fully engaged in running for the hills. Thus, it makes us wonder who might be willing to acquire the business as a going concern. We note that most of the forward products are based on Broadcom's recent Renesas purchase, which anyone could have picked up for a song a few quarters ago; a purchase as an IP buy thus seems more likely to us than a straight acquisition [...] What does this mean for others (e.g. Qualcomm)? – The impact on Qualcomm from an exit would, of course, be positive. The impact from a sale is a bit murkier, depending on the identity of the potential purchaser and exactly what they choose to buy. A purchase of an existing baseband player (Intel, Marvell, etc) would likely have limited impact on Qualcomm; a purchase by a big customer (say, Apple or Samsung) would obviously be worse. Still, we note that Broadcom was wholly unable to do anything meaningful with this business; we would be surprised if anyone else could [...] What will happen to current management? – We note that connectivity will be lumped in together with Broadband under the management of Dan Marotta. Bob Rango, the current head of Wireless, will handle the sale (no word on what he does next). Additionally, we wonder what the ultimate fate of CEO Scott McGregor might be – we note that he has a substantial number of options that expire in Jan 2015, with a potentially significant payday should the stock notably appreciate, and the time might be ripe for change at the top (we believe the stock would react favorably to such a move) [...] Where will growth come from going forward? – Baseband has been looked on as a strong source of growth going forward. Not anymore. Thus, many investors are likely to ask where growth can come from going forward. However, growth challenges are not new for Broadcom (indeed, wireless has been a bit of a headwind for a while), and the other businesses (Infrastructure, Broadband) are solid (we see Infrastructure, long term at high – single or low double digits, offset of course by cyclicality, and believe Broadband can deliver low to mid single digit normalized growth). Stable, more profitable businesses might be better than uncertain, costly baseband anyway.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.